Practice Test

1 question has the remaining areas to be answered.

The Standard Stairs company sales are 1 million. Its variable cost are 75 percent of sales, and excess capacity would permit a substantial expansion in sales without additional fixed assets. Management is considering a change in credit policy, and you are asked to analyze the potential benefits of the change. Currently, the company sells on terms of 1/10 net 30. Thirty percent of its customers take the discount with the remaining paying on average in 40 days. Bad debt losses are running at 4% of sales. the costs of capital tied up in receivables is 15 percent.is considering changing the terms of trade from 1/10 net 30 to 5/10 net 30. Half of Standard Stair's customers will take the new discount and pay for the 10th day. The other half will have an ACP of 40 days. Sales will increase by 500,000 and bad debt losses will decline to 3% of total sales

a. what is the old credit period?

b. what is the new credit period?

So we don't have a carry through error, assume the old credit period was 35 and the new credit period is 29 day. (these are not answers to the questions above.)

Change in investment= change associated with original sales+ change from new sales

this questions and the next question asks you each part of the above question assuming there is 360 days a year.

c. What is the new investment Standard Stair's will make in AR because existing customers take the discount?

d. What is the new investment Standard Stair's will make in A/R because of new customers?

e. Without consideration of bad debts and the discount, what is the profit from new customers Standard Stairs will achieve?

f. by how much will bad debts increase or decrease the profits you calculated in the previous question?

g. how much will the net effects (old discounts- new discounts) of the discounts have on the profits of Standard Stairs? If you answer negative, enter a negative number.

H. What is the Net Present Value of Standard Stair's proposed investment in AR?